Thursday, March 13, 2008

The Treasury Dept and the Federal Reserve bank issued a joint policy statement. Too bad the policy, as published in the Journal, is so vague and wimpy. They call for more regulation of mortgage lenders and brokers, but don't say what regulations were not enforced. They call for licensing of mortgage brokers, where as they ought to call for the total elimination of mortgage brokers. Brokers are middle men who take a cut, and con borrowers into signing bad mortgages. They call for ratings firms to rate ordinary bonds differently from "complex structured products". They should have eliminated the "complex structured products" because they are IOU's disguised as real bonds. Issuers of IOUs (aka mortgage backed securities) would have to reveal if the mortgage borrowers had shopped around for a good credit rating. This is close to worthless. Of course the mortgage borrowers have attempted to get the best credit rating they can, 'cause it entitles them to a cheaper mortgage. And some credit raters are more generous than others, or are willing to take bribes for a good rating.Treasury Secretary Paulson's closing quote. "We are going to be mindful when we impliment it to not create a burden. But we think it's very appropriate to lay out some of the causes and some of the steps that need to be taken... to minimize the likelihood of this happening again. The aim is to alter the rules and incentives that led to excesses that are now painfully evident--- years of lending and and investing at prices that didn't fully recognized the risks by institutions with inadequate capital cushions, the development of financial instruments so complex that even the most sophisticated didn't understand them, and a deterioration of lending standards. "

Let me rephrase Paulson's talk. "We will let you continue to make most of these shady deals. You need to charge more interest on loans, and you have to have a bigger rainy day fund to cover the shaky loans that go bad. The sophisticated investors didn't buy subprime mortgage bonds because they were so complex. The rubes were taken in and fleeced. And you issued too many mortgages to people with no income, no jobs and no assets ("ninja" borrowers).